Question

Crane Company has provided information on intangible assets as follows. A patent was purchased from Ford Company for $2,330,000 on January 1, 2016. Crane estimated the remaining useful life of the patent to be 10 years. The patent was carried in Ford's accounting records at a net book value of $2,053,000 when Ford sold it to Crane. During 2017, a franchise was purchased from Polo Company for $513,000. In addition, 4% of revenue from the franchise must be paid to Polo. Revenue from the franchise for 2017 was $2,591,000. Crane estimates the useful life of the franchise to be 10 years and takes a full year's amortization in the year of purchase. Crane incurred research and development costs in 2017 as follows. Materials and equipment Personnel $145,200 190,200 107,300 Indirect costs $442,700 Crane estimates that these costs will be recouped by December 31, 2020. The materials and equipment purchased have no alternative uses. On January 1, 2017, because of recent events in the field, Crane estimates that the remaining life of the patent purchased on January 1, 2016, is only 5 years from January 1, 2017.

Answer 1

Answers:

1. Intangibles section of Crane's Balance Sheet:

CRANE COMPANY
Intangibles Section of Balance Sheet
For the year ended December 31,2017
Current Assets
Patent from Ford company, net	1,677,600
Franchise from Polo Company, net	461,700
Total intangibles	2,139,300

Calculation :

Computation of Patent from Ford Company:
Cost of patent at date of purchase		2,330,000
Amortization of patent for 2016		-233,000
		2,097,000
Amortization of patent for 2017		-419400
Patent balance		1,677,600

Computation of Franchise from Polo Company
Cost of franchise at date of purchase		513,000
Amortization of franchise for 2017		-51300
Franchise balance		461,700

2. Income Statement Effect :

CRANE COMPANY
Income Statement Effect
For the year ended December 31, 2017
Patent from Ford Company:
Amortization of patent for 2017		419,400
Franchise from Polo Company:
Amortization of franchise	51,300
Payment to Polo Company	103,640
		154,940
Research and development costs		442,700
Total Charged against Income		1,017,040

Calculation :

*Amortization of patent for 2017 = Cost of patent at date of purchase - Amortization of patent for 2016/Remaining Life =

= (2,330,000-233,000)/5 = 2,097,000/5 = 419,400

* Amortization of franchise = Cost of franchise at date of purchase/ useful life

=513,000/10 = 51,300

* Payment to Polo Company = Revenue from Franchise * % of revenue from franchise to pay Polo

= 2591000 * 4% = 103,640